Chapter
Three
Exploring
Global Business
The Basis for International Business
• International business
– All business activities that involve exchanges across
national boundaries
• Some countries are better equipped than others to
produce particular goods or services
– Absolute advantage
• The ability to produce a specific product more efficiently
than any other nation
– Comparative advantage
• The ability to produce a specific product more efficiently
than any other product
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The Basis for International Business
(cont’d)
• Exporting
– Selling and shipping raw
materials or products to
other nations
• Importing
– Purchasing raw
materials or products in
other nations
and bringing them into
one’s own country
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The Basis for International Business
(cont’d)
• Balance of trade
– The total value of a nation’s exports minus the
total value of its imports over some period of
time
• Trade deficit
– A negative (unfavorable) balance of trade—
imports exceed exports in value
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2006 US trade deficit
5
Restrictions to International Business
• The reasons for restricting trade
include
– Political
– economic pressures
– mistrust of other nations.
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Discuss
• Sugar is one of the most heavily protected industries
in the US. This is why we pay 2-3 times more for it
than the rest of the world. The US imposes price
floor, import quota’s, and high tariffs on foreign
countries trying to sell sugar in the US. Americans
consume on average 34 teaspoons of sugar a day (3
times more than is recommended by the USDA)
• What do you consume that contains sugar?
• How much $ would you save if trade
restrictions were removed on sugar?
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Types of Trade Restrictions
• Import duty (tariff)
– A tax levied on a particular foreign product
entering a country
• Dumping
– The exportation of large quantities of a product
at a price lower than that of the same product
in the home market
• Nontariff barriers
– Nontax measures imposed by a government
to favor domestic over foreign suppliers
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Types of Trade Restrictions
(cont’d)
– Types of non-tariff restrictions
• Import quota—a limit on the amount of a particular
good that may be imported during a given time
• Embargo—a complete halt to trading with a particular
nation or in a particular product
• Foreign exchange control— restriction on amount of
foreign currency that can be purchased or sold
• Currency devaluation—the reduction of the value of a
nation’s currency relative to the currencies of other
nations
• Bureaucratic red tape—a subtle form of trade
restriction that imposes unnecessarily burdensome and
complex standards and requirements for imported
goods
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The World Economic Outlook for Trade
• At the current rate of global
economic growth (approx 3%
annually), world production of
goods and services will double by
2020.
• Inflation is slowing in almost all
regions of the world, especially in
developing nations
• 95% of the world’s population
lives outside of the US.
• What does this tell us about the
world economy?
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Value of U.S. Merchandise Exports
and Imports, 2004
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Ten Largest Foreign and U.S.
Multinational Corporations
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International Economic Communities
• Economic community
– An organization of nations formed to promote
the free movement of resources and products
among its members and to create common
economic policies
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The Evolving European Union
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Members of Major International
Economic Communities (cont’d)
North American Free Trade Agreement
(NAFTA)
United States
Canada
Mexico
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Members of Major International
Economic Communities (cont’d)
ASEAN Free Trade Area
(AFTA)
Brunei
Burma
Cambodia
Indonesia
Laos
Malaysia
Philippines
Singapore
Thailand
Vietnam
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Members of Major International
Economic Communities (cont’d)
Organization of Petroleum Exporting Countries
(OPEC)
Algeria
Indonesia
Iran
Iraq
Kuwait
Libya
Nigeria
Qatar
Saudi Arabia
United Arab Emirates
Venezuela
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Other International Economic
Communities
•
•
•
•
•
European Economic Area (EEA)
Pacific Rim
Commonwealth of Independent States (CIS)
Caribbean Basin Initiative (CBI)
Common Market of the Southern Cone
(MERCOSUR)
• Organization for Economic Cooperation and
Development (OECD)
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West African CET Members
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Methods of Entering
International Business
• Licensing
– A contractual agreement in which one firm permits
another to produce and market its product and use its
brand name in return for a royalty or other
compensation
• Exporting
– May use an export/import merchant who assumes the
risks of ownership, distribution, and sale
• Joint ventures
– A partnership formed to achieve a specific goal or to
operate for a specific period of time
• Totally owned facilities
– Production and marketing facilities in one or more
foreign nations
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Financing International Business
• The Export-Import Bank of the United States
(Eximbank)
– An independent agency of the U.S. government whose
function it is to assist in financing the exports of American
firms
• Multilateral Development Bank (MDB)
– An internationally supported bank that provides loans to
developing countries to help them grow
• World Bank, Inter-American Development Bank (IDB),
Asian Development Bank (ADB), African Development
Bank (AFDB), European Bank for Reconstruction and
Development (EBRD)
• The International Monetary Fund (IMF)
– An international bank with more than 183 member nations
that makes short-term loans to developing countries
experiencing balance-of-payment deficits
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Discuss
• What do you see as the greatest challenge of
international business?
• What do you see as the greatest benefit of
international business?
• Are you for or against free trade?
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